The USA, under the new Trump Administration, has unilaterally imposed tariffs on all imports into the country.
The first step, effective from 5th of April 2025, was the imposition of a “base line” tariff of 10%. Countries which now only face the base rate are the UK, Brazil, Australia, New Zealand, Türkiye, Colombia, Argentina, UAE and South Africa.
The second and much more drastic step is the levy of reciprocal tariffs on the ‘worst offenders’, with effect from the 9th of April 2025. These are countries which have large trade surpluses with the USA in relation to their imports from the USA.
Apparently, the tariff is equal to the trade surplus of the country exporting to the US as a percentage of imports by the country from the USA, divided by 2.
For example, Pakistan exports $5.4 billion of goods and imports approximately $3.4 billion of goods from the USA. Therefore, according to the above-mentioned formula the reciprocal tariff on Pakistani exports is 29%.
Other exporting countries or groups of countries will face accordingly reciprocal tariffs, depending on the size of the trade surplus with the USA. It has been set at 34% on imports from China, 45% on Vietnam, 36% on Thailand, 24% on Japan, 30% on South Africa, 32% on Taiwan and so on.
Among South Asian countries, Pakistan exporters will have to pay a tariff of 29%. This is in comparison to 26% in the case of India and 37% in the case of Bangladesh.
There is clearly a need to derive the implications of this tariff by the USA on Pakistan’s exports.
The USA today is, in fact, the largest individual country export market of Pakistan. The SBP estimates are that in 2023-24, Pakistan exported goods worth $5.4 billion to the USA. The trade surplus was almost $2 billion. Therefore, the sizeable trade surplus with the USA has been a significant factor in restricting the current account deficit in Pakistan.
A comparison with Pakistan’s trade with China will highlight the value of the US market. Pakistan has a free trade agreement with China, but is experiencing a very large bilateral trade deficit, which was a huge $10.8 billion in 2023-24. Exports to China were only $2.7 billion, despite the free trade agreement, as compared to imports of $13.5 billion.
There is need to understand the implications of the imposition of high import tariffs by the USA on global trade. The total global goods imported by USA were $3108 billion, equivalent to almost 13% of total world trade.
Exports of the USA globally in 2023 were $2045 billion, implying a very large trade deficit of $1063 billion. This helped many countries like China, the member countries of the EU and many developing countries in sustaining their balance of payments position and building up large foreign exchange reserves. For example, China today has colossal foreign exchange reserves of $3227 billion.
Historically, the USA has maintained a very open trade policy. Prior to the recent imposition of high import tariffs, they were very low. According to the WTO, the average import tariff imposed by the USA was only 3.3%. It was, for example, 1.7% on textile imports and 3.4% on transport equipment.
The pre-dominant sources of US imports were 50% from high income global economies, 27% from middle-income East Asian and Pacific economies and 17% from Latin American countries. These groups of countries will be most adversely affected by the imposition of high import tariffs by the USA.
Turning now to the impact on Pakistan’s exports, there is need to reiterate that the USA is the largest single country export market of the country. The exports are 72% in the form of value-added textile exports and constitute almost 20% of Pakistan’s global textile exports. Other exports include articles of leather, cereals, etc.
The risks posed to the textile sector are substantial. Initially, the high import tariffs will imply higher prices in the US domestic market. This will reduce exports significantly by 10% to 15%. Subsequently, there may be the beginnings of import substitution by the manufacturing sector of the USA.
Hitherto, the manufacturing sector in the USA has been contracting as a share of the economy. The share in GDP was 16% in 1995 of the manufacturing sector. It has shrunk to 10.5% only by 2023. There is some merit to the argument that the extremely low import tariffs have contributed to a sharp decline in manufacturing activity in the USA.
The fundamental question is whether there will be a strong retaliatory response by other countries to the levy of high import tariffs by the USA. This has apparently already happened in the case of Mexico and Canada. A broad-based escalation of tariffs in reaction to the US move will lead to a severe contraction in the volume of world trade by 7 to 10%. Similarly, China has raised the import tariff on imports from the USA to 34%.
Pakistan needs to develop and reorient its export promotion policy in line with this unfortunate change in the world trade regime. In the short run, the exchange rate will need to depreciate to at least to remove the competitive advantage given to India, with lower US tariffs, than those imposed on Pakistan. However, Pakistan will gain a significant competitive edge over Bangladesh with an import tariff in the USA, 8 percentage points lower.
There will be, however, the scope for one positive change. The import tariff levied by the USA on China is higher at 34% than at 29% on Pakistan. Along with the free trade agreement among the two countries, the time has come for Pakistan to become a part of the global supply chain of China.
In particular, China could invest in value added textile and other manufacturing units in Pakistan, for export to the USA.
Overall, world trade is likely to be in a state of turmoil for some time. The USA may reconsider the magnitude of retaliatory tariffs in the face of consumer reaction to higher domestic prices. However, additional import tariff revenues of up to $650 billion will be generated. This could lead to some compensatory reduction in the income tax and other taxes in the USA.
World trade will need to be very carefully monitored to identify the negative developments in response to the emerging global trade war.
Copyright Business Recorder, 2025
